Fed rate cut signals worry on economy Hopes: Lower interest payments on credit cards and home-equity loans may be just weeks away.

Posted: September 19, 2007

Consumers won't have to wait long to see the effect of the Federal Reserve's decision to cut the overnight lending rate between banks.

It could come as soon as their next credit card bill or the payment-due notice on their variable home-equity loan.

"Borrowers can look forward to lower rates on home-equity lines of credit within the next month, while credit card rates can lag behind as much as three months," said Greg McBride, senior financial analyst at Bankrate.com, a personal-finance Web site.

The Federal Reserve's decision yesterday to cut the overnight lending rate from 5.25 percent to 4.75 percent will have a ripple effect for borrowers.

Banks lend one another money overnight to cover reserves and to meet other temporary obligations as they tally their books each day. The interest they pay on loans to one another immediately affects the prime interest rate, which is the rate lenders charge to their most creditworthy borrowers.

Interest rates on lots of short-term loans - including credit card debt, auto loans, and variable home-equity loans - are tied to the prime rate. Holders of some Chase Visa cards, for example, could see a drop in their payments as early as Friday.

That's because Chase calculates the interest rate for some of its credit cards based on the highest prime rate published in the Wall Street Journal two business days before the close of the billing cycle, said Paul Hartwick, spokesman for JPMorgan Chase & Co.'s credit card division, which is based in Wilmington.

Someone with a card with an interest rate of 6.99 points over yesterday's prime rate of 8.25 percent was paying an interest rate of 15.24 percent, he said. That will drop to 14.74 percent.

How quickly rates drop depends on the pricing policies of individual banks. McBride said that some banks tended to move more slowly to cut interest rates than they did to raise them.

Yesterday's decision by the Fed puts ordinary consumers in the same economic dilemma as businesses making major capital investments.

They have to decide when to borrow.

Take for example, Dennis Boyle's oldest daughter. She is a psychology major at Rosemont College with four low-cost federal student loans that she must begin to pay off when she graduates in the spring.

She probably will rely on her father, the chief financial officer at Malvern Federal Savings Bank in Paoli, to advise her on whether interest rates are falling enough to replace the four loans with one consolidated loan at a lower rate.

"What she's been getting in the mail," he said, "are a lot of offers from banks to consolidate her loan now, because they know she's coming to the end of her term." But he said it might make sense for her to wait to see whether the Fed lowered rates again closer to her graduation.

Boyle also is watching the Fed as a banker. How quickly the Paoli bank lowers its rates on installment loans depends, he said, on how the market reacts.

"We really don't know what the appetite [for credit] is," he said. "We don't know how much people are holding back on adding that addition, or improving the bathroom. But you may see people more willing to spend during the holidays if their existing payments are lower."

Contact staff writer Jane M. Von Bergen at 215-854-2769 or jvonbergen@phillynews.com.

Mortgage Payments

Here's how a one-quarter percentage point change in mortgage rates affects monthly payments on a $200,000 mortgage.*

Rate Monthly payment

6.00% $1,200

6.25 1,232

6.50 1,266

6.75 1,298

7.00 1,330

*30-year, fixed-rate mortgage. The current monthly U.S. average rate is 6.86 percent.

SOURCE: HSH Associates

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